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Angela Lyons, consumer economics expert

5/15/2012 8:00 am

With the U.S. economy still shaky from the collapse of the subprime mortgage industry, financial experts are warning of a similar economic threat in the student loan industry, due to spiraling debt and rising default and delinquency rates. Angela Lyons, a professor in the department of agricultural and consumer economics and director of the Center for Economic and Financial Education, is an expert in household finance, credit access and bankruptcy. Lyons, who is involved in several national and international projects related to consumer economics, spoke recently with News Bureau writer Sharita Forrest.

There’s been a lot of press about the interest rate on student loans possibly doubling. What’s the potential impact?

The interest rate on federal Stafford subsidized student loans, which was reduced by President Bush to 3.4 percent, is set to expire July 1. If Congress doesn’t act, the rate is going to revert to 6.8 percent.

Interest is deferred on a portion of the principal if the loan is subsidized.

While that rate change might not seem significant, it would mean an extra $1,000 on average. In this economy, that’s a lot for students and their families to come up with.

Also the amounts that students are taking out in private loans has skyrocketed in recent years because financial aid hasn’t kept up with rising tuition costs. It used to be parents were helping cover these costs a lot more, but now they’re in bad financial straits themselves.

What needs to be done? Do we just need to do a better job of educating students about taking out student loans?

The fastest growing segment of the bankruptcy population is recent college grads under age 25. That’s a little bit unsettling.

There are discussions about relaxing the bankruptcy laws, making it easier to discharge private student loans, or about offering loan forgiveness through public service.

We have to really re-think how we’re doing things. If we have kids coming out of a public institution with huge student loan debt, and they’re from socioeconomic backgrounds where they feel this is the only way they can access higher education and public higher education, there’s really something wrong with our system.

The solution isn’t to increase the limits so they can borrow more. It’s really re-thinking the cost and affordability of postsecondary education. We need to take a look at the systems and structures that we have in place because there’s a lot of things that aren’t working properly.

Almost half of the college graduates under age 25 are unemployed or underemployed. Even if they can find a job, are they going to have it a year from now?

They’re facing huge educational and training deficiencies trying to compete with workers from other countries that are perceived as better qualified. We need to improve education and training opportunities so that they can think more creatively and develop and produce new things. That may mean training people in some technical skills in manufacturing or something different than the traditional four-year degree.

In addition, this generation is going to see fewer benefits in the workplace because it’s getting more and more expensive for employers to offer health care and retirement benefits.

Right now, we’re also seeing price increases in basic staples such as groceries, gas and other goods, which can really eat into a person’s already-reduced budget.

If interest rates remain at record lows, it’s going to be difficult for young adults to find safe ways to save and grow their money. If they want to see a real return on their investments, they will need to invest in the securities markets, which are complex and carry more risk.

They’re going to have to bear their own financial burdens as well as those of their aging parents, who haven’t prepared adequately for retirement or long-term care needs.

When we aren’t fixing the sources of those problems with the systems and structures that we have in place, it’s very difficult for young adults to establish long-term economic and financial security, no matter how knowledgeable and skilled they are in economics and finance.

Are the recently revised bankruptcy laws helping people?

A law passed in 2005 mandated that everyone complete two hours of credit counseling before filing for bankruptcy and a two-hour financial education program after they file, but before their debts are discharged. The financial education course teaches people about some of the challenges they’ll be facing after bankruptcy and teaches them how to rebuild their credit.

There was a lot of concern about whether these educational components should be mandated and if they really were going to help people because it was believed that some people were being wiped out financially through events that weren’t their fault, such as the death of a spouse or an illness.

I am working with the largest, full-service credit-counseling agency, Money Management International, to track a group of bankruptcy filers through the process and see if the financial training helped people get back on their feet.

The client feedback has been overwhelmingly positive. Over 95 percent of the people surveyed were very satisfied with the counseling and felt like they’d learned something and would be able to improve their financial behaviors. In particular, they’ve learned basic budgeting and consumer decision-making skills, and those skills appear to be holding over time.

During the counseling, they have to go through a very intensive budgeting process, reporting all their income, expenses, assets and liabilities. Many people have never done that, even at the stage of bankruptcy.

Now we’re hooking up with a credit reporting agency to look at credit scores and other credit-worthy characteristics. People are reporting that they’re being more careful about their credit choices, and when we get the data from the credit-reporting agency, we’ll be able to look at that more closely.

What approaches is the U.S. taking to teaching financial literacy to youth?

We are doing tons of things. In fact, Illinois is one of only 13 states that require high school students to complete a personal finance course prior to graduation.

There are standard classroom curricula in the school systems and in after-school programs. There are some fabulous things coming out in online and game technology to teach children and young adults various financial and economic education concepts, such as the online savings and investment game Gen i Revolution, put out by the Council for Economic Education. I’m also working with some organizations that are developing educational games using phone apps.

In the Center for Economic and Financial Education, we train kindergarten-12th grade teachers and other providers of economic and financial education. We get curricula in their hands and provide them with the latest information and resources, things like “Financial Fitness for Life” and “Learning, Earning and Investing.”

We just recently held a training conference for instructors to help them teach children and young adults basic concepts about the financial crisis.

How are other countries teaching financial literacy and is there anything that the U.S. might use?

They’re modeling a lot of things that we’ve done in the U.S. simply because we came out of the gate first, but I’m seeing a lot more creativity in how they’re tweaking things when they implement them, especially on the technology front and with real-world applications and simulations.

Basically, they’re giving more hands-on opportunities, instead of traditional instruction about financial concepts. For example, they’re giving microfinance opportunities to children in African or Asian villages, who then save or pool their money through microfinancing and use the money to benefit others in the community. Or they’ll pick a project and raise money to purchase something for their school or village. Or they’ll set up small businesses and raise funding for the community in that way.

These opportunities allow children and young adults to become engaged and see the benefits of their efforts. Not only is it motivational, it’s inspirational.

Is it most important that kids know select financial concepts, or that we create opportunities for them to put these basic skills into practice? The way that I think about financial literacy has really changed from that perspective.

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